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Nationalisation of banks without compensation: Speech by Hon. J. Fubbs (ANC) Chairperson of the PC on Trade and Industry

07 November 2017

Hon Speaker,
Honourable Members of the House
People of South Africa

The financial services sector is the heart of the South African economy and touches the life of each and every citizen. Financial services allow people to make daily economic transactions, save and preserve wealth to meet future aspirations and retirement needs, and insure against personal disaster.

Oliver Regional Tambo made it clear that to "allow the existing economic forces to retain their interests intact, is to feed the roots of racial supremacy and exploitation, and does not represent even the shadow of liberation".

The sector should be the servant of the real economy and not its master. Such an important sector should not be left purely in the hands of private capital. Allowing the sector to function without any government oversight is not the right approach. There is a crucial role to play for state banks and state institutions in the financial sector.

The attainment of the Freedom Charter objectives remains the strategic objective of the African National Congress. The clause on the people sharing in the country`s wealth states, that the banks and monopoly industry shall be transferred to the ownership of the people as a whole. How the ANC led government has reiterated the point that nationalization is not ANC neither is it government policy. Rather the policy is the pursuit of a mixed economy. In terms of nationalisation without compensation, the Constitution of the Republic of South Africa which is meant to protect all our interest, is very clear:

Section 25 (2) of the Constitution States that "Property may be expropriated only in terms of law of general application-

(a) for a public purpose or in the public interest; and

(b) subject to compensation, the amount of which and the time and manner of payment of which have either been agreed to by those affected or decided or approved by a court".

Therefore, the EFF motion is misplaced. The solution to the issues faced by the financial sector is not just to nationalise it without compensation. In recent years, there has been many debates around the financial services sector, particularly around ownership and transformation in the sector. While we recognise that the sector contributes greatly to the South African economy through Gross Domestic Product and employment.

We acknowledge that it is still questionable whether the sector is assisting in developing tools of economic transformation in our country such productive investment which will create employment, access to ownership opportunities for black people in the sector, and access to finance for small and medium sized businesses.

We have to establish what the problems are; and we have to consider whether the solutions to all our problems is outright nationalisation. In terms of the financial services sector, the ANC is prioritising the implementation of the National Development Plan`s key proposals for the finance sector including:

* broadening access to banking services for poor people in South Africa and lower banking costs through a combination of increased competitive pressures and reducing infrastructure costs;
* strengthening credit extension to productive investments including for small and medium sized firms;
* provide small businesses and co-operatives with advisory and support services;
* encouraging partnerships between South African firms and banks to provide increased project finance; and
* the transformation of ownership and broad-based empowerment in the financial services sector to ensure that back South Africans secure increased ownership opportunities to fully participate in the sector.

Parliament through joint meeting of the Standing Committee on Finance and the Portfolio Committee on Trade and Industry, since May this year have been engaging on how to address the challenges in this sector.

Existing state banks

We already have quite a few state-owned banks, and we need to ask ourselves if they are indeed adding value; or if we need to further strengthen them so that they are able to carry this economy forward and to have stronger oversight.

There are two state retail banks: the Postbank and Ithala. Postbank has millions of clients throughout South Africa, and a total deposit book of R5 billion. Ithala operates in rural KwaZulu Natal, and has lent a total of over a R1 billion

Government is working to licence these two institutions - and I urge government to fast-track the licensing of these two institutions.

We also have a number of state development finance institutions, including the Industrial Development Corporation, the Development Bank of South Africa, the National Housing Financial Corporation, and the Landbank, the national empowerment Fund (NEF) and the Small Enterprise Financing AgencyIn total, these development finance institutions lend approximately R141 billion to the real economy.

Government should ensure that the existing state-owned lenders deliver on their intended mandates. Their effective functioning would serve as an effective alternative to the commercial banks delivering:Greater competition

a) More appropriate services to meet demands of the poor
b) More credit to key sectors like SMME`s at lower interest rates
c) Lower cost of developmental credit

The challenge of financial inclusion

Although millions of South Africans have bank accounts and access to credit, but fewer South Africans have access to savings instruments. In 2016, 77 per cent of South Africans had a transactional account. 48 per cent had some form of credit (up from 24 per cent in 2011). But only 23 per cent of South African had some form of savings account.

Many people call for nationalising the existing commercial banks so that they can lend more money. But we know that many millions of our people are over-indebted and are struggling to keep up with their existing debt obligations.

Enhancing regulation

Nationalising commercial banks without correcting the existing lenders would lead to a bigger problem including increased cost to government, less money for social programmes, and poorer outcomes for the most vulnerable who have fewer alternatives.

We should not let the private banks run rampant. Without regulation, they will surely take advantage of the most vulnerable. For too long, banks have been allowed to charge what they like; offer products that are inappropriate; and generally gouge the poor.

When the National Credit Act (NCA) was promulgated into law in 2007, it was lauded as a saving grace for South Africa`s indebted consumer. The Act was viewed as one of the most comprehensive consumer protection legislations in the world. The purpose of the Act was to promote and advance the social and economic welfare of South Africans, by creating a fair, accessible, responsible and transparent credit market and industry. 10 years since the Act became law, we now have to reflect on whether the Act has lived up to its promise hence there is a review of the legislation and an amendment Bill will soon come to Parliament.

Furthermore, the new regulatory framework (commonly known as Twin Peaks) is expected to put an end to this. The new market conduct regulator through this legislation has been given powers to act against banks that offer inappropriate products or do not disclose costs correctly. The powers of the National Credit Regulator have also been strengthened to allow them to take harsher action against unscrupulous credit providers. The Trade and Industry Committee is considering new mechanisms to relieve the burden of debt of the most vulnerable.

Concentration

We must accept that we have a highly concentrated banking sector. But nationalization of banks will not fix things or address the many challenges. We have many pieces of excellent legislation in place to take firmer action on the abuse of competition, including the Competition Act. The Competition Commission has done excellent work on collusive behaviour in the banking sector.

But just trying to fine the industry is not enough. We need to create a system that in response to the high levels of market concentration government has developed a tiered banking system to allow for new entrants with proportional regulatory requirements:These requirements are:

1. Co-operative banks - at least 200 members and R1 million in savings (there must exist a common bond for sustainability purposes);
2. Mutual banks - R10 million (Basel 1), and
3. First-tier banks - R250 million (Basel 3).

A tiered banking system represents the complexity of the financial institution and therefore the risk to depositors. Large commercial bank operators pose a big risk and regulators must ensure that these banks have the governance capabilities to ensure the deposits of ordinary people will be safe.

Experience in other countries

Countries which have opted for state-owned banks offer instructive evidence.

China`s experience of poor financial performance and growing non-performing loans in the 1980s and 1990s motivated officials to reduce the government`s role in banks` credit allocation, which in turn improved the performance of the banks.

Pakistan also moved 2 privatize its state-owned banks after its experience of high non-performing loans, overstaffing and other inefficiencies. In Indonesia and India, another cost imposed by these institutions was in the form of bailouts which were ultimately funded by taxpayers.

India recently had to bail-out its state-owned banks thru a complex scheme, costing US$21bn; nearly R300 bn. If we decide to nationalise banks we need to consider the impact on the fiscus in the long-run.

Norway: To deal with the financial crisis facing the Nordic countries Europe indeed the world Norway took a decision to nationalize the banks and to review the effectiveness of this decision ten years or so later. Banks remain nationalised in Norway.

Diverting of state resources

Nationalisation without compensation is a non-starter. It is unconstitutional, and it will create huge risks to the financial sector. Our banks would immediately lose their credit ratings, and millions of rands would leave the country as foreign shareholders dumped their shares and take their money offshore. But let us assume that it is possible for government to somehow nationalise all the banks.

Overnight, the government would assume all the assets and liabilities of the banks. It will be on the hook for all losses incurred by banks. It will have to recapitalise the banks if they lose money. Government will have to become a banker.

Why is this important.

We need to ask ourselves if ordinary depositors -all the grannies out there that have their life savings in a bank - are they and will they be safe.

* These dynamics would mean that a State Lender would have to charge interest rates higher than most loan sharks or lend to only very few rich people. Therefore, the most likely people to suffer would be the poor and in particular, the poor who wished to save.
* Implications for economy: efficient rationing of credit: Municipal experience with non-payment (whose liability that become)

Conclusion

Speaker, in conclusion, the proposal to nationalise the banks is misplaced. It is not the role of the state to control all banks. We should rather make our existing state banks work better; and regulate the private banks better.

     
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